How do you adjust EBITDA for mergers and acquisitions analysis?

When adjusting EBITDA for mergers and acquisitions analysis, the focus is on obtaining a clearer picture of a company's operating performance by removing items that may distort ongoing earnings. The correct method involves adding back non-recurring expenses and excluding non-operating income.

Non-recurring expenses are one-time costs that are not expected to happen regularly in the future, such as restructuring costs or asset impairments. By adding these back into EBITDA, you get a more accurate view of the operating earnings that can be used for valuation purposes. This adjustment reflects the company's ability to generate cash flows from its core business operations.

Excluding non-operating income is also essential because this income does not derive from the regular operations of the business. Including it could inflate the EBITDA metric, making the earnings seem stronger than they might truly be. Thus, focusing on the core operating income provides a more reliable basis for analysis in the context of mergers and acquisitions.

Other methods listed, like calculating gross profit and subtracting taxes or averaging past earnings, do not specifically target operating performance in the same effective way as adjusting EBITDA does. Gross profit does not account for operating expenses, and averaging past earnings might not accurately project future performance, especially in the dynamic environment of M&A.